Falling bond yields fail to tame Gold bears

10-Year Treasury yields retreated below 3.0 percent after threatening a bond bear market for the past week.

10-Year Treasury Yield

Breakout above 3.0 percent would complete a large double bottom reversal in the secular down-trend.

10-Year Treasury Yield

Rising bond yields would be expected to weaken demand for gold as the opportunity cost of holding precious metals increases.

The other major influence on gold prices, the Dollar, continues to strengthen. A strong Dollar would weaken the Dollar-price of gold.

The Dollar Index is rallying to test resistance at 95. Penetration of the long-term descending trendline in April suggests that a bottom is forming. Bullish divergence on the Trend Index indicates buying pressure.

Dollar Index

Spot Gold retraced to test the new resistance level at $1300/ounce — the former support level. The declining Trend Index indicates selling pressure and respect of the descending trendline would warn of a test of primary support at $1250/ounce.

Spot Gold

Australian gold stocks fared better, with the All Ordinaries Gold Index finding support at 4950 and the rising Trend Index signaling buying pressure. Respect of the long-term trendline would confirm another primary advance.

All Ordinaries Gold Index

The reason is not hard to find. The Australian Dollar is at a watershed, testing primary support at 75 US cents as the greenback rallies. A Trend Index peak below zero would warn of strong selling pressure. And breach of primary support would signal a decline to 69/70 US cents.

AUDUSD

Offering a potential bull market for Aussie gold stocks.

Gold stocks retreat

The Dollar rally continues, with the Dollar Index heading for a test of resistance at 95. Penetration of the long-term descending trendline suggests that a bottom is forming. Bullish divergence on the Trend Index indicates buying pressure.

Dollar Index

But rising crude prices still threaten to weaken the Dollar.

WTI Light Crude

Spot Gold broke support at $1300, warning of a test of primary support at $1250/ounce as the Dollar strengthens. The declining Trend Index indicates selling pressure.

Spot Gold

A weakening Australian Dollar continues to test support at 75 US cents as the greenback rallies. Breach would offer a long-term target of 69/70 US cents.

AUDUSD

The weaker Aussie Dollar offered some respite for local gold stocks but the All Ordinaries Gold Index is retracing to test its new support level at 4950/5000. Respect of the rising trendline would confirm a fresh advance and long-term target of 6000.

All Ordinaries Gold Index

Aussie Gold stocks continue strong run

The Dollar rally is slowing, with the Dollar Index running into resistance at 93, ahead of the anticipated 95. Penetration of the descending trendline suggests that a bottom is forming. Bullish divergence on the Trend Index indicates buying pressure. Retracement that respects the new support level at 91 would be a bullish sign. Breach of 88.50 is unlikely but would warn of another primary decline.

Dollar Index

Rising crude prices weaken Dollar demand.

WTI Light Crude

Spot Gold continues to test support at $1300. The declining Trend Index indicates selling pressure and a peak below zero would warn of another test of primary support at $1250/ounce.

Spot Gold

Australian gold stocks continue their strong run. Retracement of the All Ordinaries Gold Index that respects the new support level at 5000/5100 would confirm a fresh advance and long-term target of 6000.

All Ordinaries Gold Index

A weakening Aussie Dollar, testing support at 75 US cents, is driving local gold prices. Breach of support would offer a long-term target of 69/70 US cents.

AUDUSD

Aussie gold stocks breakout

The Dollar rally continues, with the Dollar Index headed for a test of resistance at 95. Penetration of the descending trendline suggests that a bottom is forming. Bullish divergence on the Trend Index indicates buying pressure.

Dollar Index

But rising crude prices weaken Dollar demand.

WTI Light Crude

Despite the Dollar rally, Spot Gold found support at $1300, with a long tail indicating buying pressure. Recovery of the Trend Index above zero would confirm.

Spot Gold

But Australian gold stocks are running ahead. Breakout of the All Ordinaries Gold Index above resistance at 5000/5100 signals a fresh advance with a long-term target of 6000.

All Ordinaries Gold Index

Helped by a weakening Aussie Dollar, testing support at 75 US cents. Breach of support would offer a long-term target of $0.69/$0.70.

AUDUSD

How QE reversal will impact on financial markets

The Federal Reserve last year announced plans to shrink its balance sheet which had grown to $4.5 trillion under the quantitative easing (QE) program.

According to its June 2017 Normalization Plan, the Fed will scale back reinvestment at the rate of $10 billion per month and step this up every 3 months by a further $10 billion per month until it reaches a total of $50 billion per month in 2019. That means that $100 billion will be withheld in the first year and $200 billion each year thereafter.

How will this impact on financial markets? Here are a few clues.

First, from the Nikkei Asian Review on January 11:

The yield on the benchmark 10-year U.S. Treasury note shot to a 10-month high of 2.59% in London, before retreating later in the day and ending roughly unchanged in New York. Yields rise when bonds are sold.

The selling was sparked by reports that China may halt or slow down its purchases of U.S. Treasury holdings. China has the world’s largest foreign exchange reserves — holding $3.1 trillion, about 40% of which is in U.S. government notes, according to Brad Setser, senior fellow at the Council on Foreign Relations.

Chinese officials, as expected, denied the reports. But they would have to be pondering what to do with more than a trillion dollars of US Treasuries during a bond bear market.

Treasury yields are rising, with the 10-year yield breaking through resistance at 2.60%, signaling a primary up-trend.

On the quarterly chart, 10-year yields have broken clear of the long-term trend channel drawn at 2 standard deviations, warning of reversal of the three-decade-long secular trend. But final confirmation will only come from a breakout above 3.0%, completing a large double-bottom.

Withdrawal or a slow-down of US Treasury purchases by foreign buyers (let’s not call them investors – they have other motives) would cause the Dollar to weaken. The Dollar Index recently broke support at 91, signaling another primary decline.

The falling Dollar has created a bull market for gold which is likely to continue while interest rates are low.

US equities are likely to benefit from the falling Dollar. Domestic manufacturers can compete more effectively in both local and export markets, while the weaker Dollar will boost offshore earnings of multinationals.

The S&P 500 is headed for a test of its long-term target at 3000*.

Target: 1500 x 2 = 3000

Emerging market borrowers may also benefit from lower domestic servicing costs on Dollar-denominated loans.

Bridgewater CEO Ray Dalio at Davos:

We are in this Goldilocks period right now. Inflation isn’t a problem. Growth is good, everything is pretty good with a big jolt of stimulation coming from changes in tax laws…

If there is a downside, it is likely to be higher US inflation as employment surges and commodity prices rise. Which would force the Fed to raise interest rates faster than the market expects.

Gold as ‘Trump insurance’

Yesterday’s solid blue candle on the gold chart [XAUUSD] confirms my view of the precious metal as a form of “Trump insurance”. After Trump and North Korea exchanged threats suggesting nuclear retaliation, gold gained 1.32%, breaking resistance at $1275/ounce. Follow-through above $1300 would signal a primary advance, with a target of $1400*.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1200 ) = 1400

From the BBC:

US President Donald Trump says North Korea “will be met with fire and fury” if it threatens the US.

His comments came after a Washington Post report, citing US intelligence officials, said Pyongyang had produced a nuclear warhead small enough to fit inside its missiles.

This would mean the North is developing nuclear weapons capable of striking the US at a much faster rate than expected.

The UN recently approved further economic sanctions against the country.

The Security Council unanimously agreed to ban North Korean exports and limit investments, prompting fury from North Korea and a vow to make the “US pay a price”.

The heated rhetoric between the two leaders intensified after Pyongyang tested two intercontinental ballistic missiles (ICBM) in July, claiming it now had the ability to hit the US.

Mr Trump told reporters on Tuesday: “North Korea best not make any more threats to the US. They will be met with fire and fury like the world has never seen.”

Gold responds to crude strength and Dollar support

The Dollar Index is testing primary support between 92 and 93. Breach of support would offer a long-term target between 83 and 84* — a bullish sign for gold.

Dollar Index

*Target: 93 – ( 103 – 93 ) = 83

Crude continues to test resistance at $50/barrel. Respect would indicate another test of the lower trend channel, around $40/barrel, continuing the primary down-trend. Follow-through above $50 would suggest that a bottom has formed and the next correction is likely to be higher than the last low at $42.

Nymex Light Crude

Gold retraced to test support at $1250/ounce — in line with crude strength and Dollar support. Respect of support is more likely and would indicate another test of $1300. Reversal below $1250 is unlikely but would warn of another test of primary support at $1200.

Spot Gold

Silver also retraced and is likely to test primary support at $15.50. Rising Twiggs Trend Index suggests that another test of resistance at $17 remains likely. Breakout above $17 would be bullish for gold.

Spot Silver

ASX banks spoil the iron ore party

I underestimated the strength of iron ore which has now broken resistance at 70, suggesting that a bottom is forming. Strength of the latest rally indicates that the next correction is likely to find support at 60.

Iron Ore

The Resources sector responded, with the ASX 300 Metals & Mining index headed for a test of its February high at 3200 after recovering above support at 3000.

ASX 300 Metals & Mining

Banks have been on the receiving end, however, with the ASX 300 Banks index testing short-term support at 8500. A Twiggs Money Flow peak below zero warns of strong selling pressure. Breach of 8500 would signal another test of primary support at 8000.

ASX 300 Banks

The ASX 200 continues to form a narrow line, consolidating between 5600 and 5800. Declining Twiggs Money Flow, with a peak below zero, warns of selling pressure. Breach of support at 5600 remains likely, despite the iron ore rally, and would signal a primary down-trend.

ASX 200

ASX stalls

Iron ore is testing resistance at 70. Respect would warn of another test of primary support at 53, while breakout would suggest that a bottom is forming and the next correction is likely to find support at 60.

Iron Ore

The Resources sector remains wary, with the ASX 300 Metals & Mining index retreating after a false break above resistance at 3050.

ASX 300 Metals & Mining

The ASX 300 Banks index retraced from resistance at 8800, heading for a test of the rising trendline and short-term support at 8500. Twiggs Money Flow continues to warn of selling pressure despite indications from APRA that they are unlikely to require further capital raising. Reversal below 8500 would warn of another test of primary support at 8000.

ASX 300 Banks

The ASX 200 has stalled, consolidating between 5600 and 5800 over the last two months. Declining Twiggs Money Flow, with a peak below zero, warns of selling pressure. Breach of support at 5600 is more likely, with an ensuing down-trend, but a lot depends on how iron ore behaves in the next few weeks.

ASX 200

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.

~ Mark Twain (Samuel Clemens)